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In the hedge fund world, there aren’t many money managers who are as prophetic as David Tepper. Tepper’s fund, Appaloosa Management, manages close to $16 billion in assets and returned 25% last year after fees (YTD through Dec. 17th). Clearly, any financial professional that has Carnegie Mellon’s business school named after them by the age of 55 is someone to pay close attention to. Last month, we discussed Tepper’s prediction that equity markets have “a lot” of upside in 2013, and the Fed’s continued monetary stimulus creates a scenario with “very limited downside” (see 5 Stocks You Can ‘Tepperize’ Your Portfolio With in 2013).

Tepper’s entire 13F portfolio can be seen on his profile page at Insider Monkey, but we’re going to take a focus on the hedge fund manager’s most promising stock picks in the small-cap space. Generally speaking, hedge funds’ small-cap investments are much more successful than their large-cap picks, which is a phenomenon we’ve seen across the majority of the industry’s key players.

Between 1999 and 2009, our “small-cap strategy,” which follows the most popular small-cap stocks among the hedge funds we track, generated a monthly alpha of 120 basis points. To share these picks, we started publishing a quarterly newsletter at the end of August, and since this time (up to December 21st), the strategy returned 15.4% versus 2.1% for the S&P 500 index ETF (SPY). Check out our newsletter here.

Focusing on David Tepper and Appaloosa Management in particular, we’re going to take a look at the hedge fund manager’s top five small-cap stock picks. This quintet is compiled through the use of Appaloosa’s most recent (Q3) 13F filing with the SEC, and is listed in order of market capitalization at the end of the third quarter. In accordance with the standard definition of “small-cap,” we’ll focus on stocks with a market capitalization between $250 million and $2 billion. Let’s get started.

US Airways Group, Inc. (NYSE:LCC) was Tepper’s top small-cap pick at the end of Q3, accounting for 3.53% of the fund’s 13F portfolio, good for his ninth largest holding. This airline operator looks to be on the eve, figuratively speaking, of a merger with American Airlines, though nothing is set in stone. AA parent AMR Corp. is still considering its options, but American’s CEO Tom Horton told The Republic earlier this week that a solution will be revealed in “a matter of weeks.”

If a deal does occur, most analysts estimate synergistic cost savings at close to $500 million, and additional revenue expectations are nearly twice this figure. For a company that Wall Street expects to make a little over $14 billion in top line revenues next year, a merger would create significant upside for US Airways shares. The stock already trades at a lowly price-to-sales multiple of 0.18, so there’s an obvious value play here, even without AA. While there’s currently no way for US Airways bulls to determine how their shares may be split up after a deal, the stock represents a rather intriguing ‘growth at a reasonable price’ opportunity.

Mueller Water Products, Inc. (NYSE:MWA) was the hedge fund manager’s second largest small-cap holding at the end of last quarter, just cracking Appaloosa’s top 25 holdings overall. Mueller operates in a curious business, manufacturing and selling products related to the distribution of water. Within the company’s mix lies fire hydrants, valves for drinking, waste and gas systems. Mueller has been especially kind to Tepper’s portfolio over the past year, returning close to 112%. After finishing 2012 with earnings of four cents a share, the Street expects Mueller to finish 2013 with an EPS of $0.17, before reaching a 27-cent figure by the end of 2014. The combination of a continued U.S. housing recovery and a decaying water infrastructure should drive this excellent growth.